Canada blocks BHP bid for Potash

Federal decision ends Anglo-Australian miner’s $38.6-billion bid

AshleyP. Lau

SarahTurner

SAN FRANCISCO (MarketWatch) — The Canadian government late Wednesday rejected Anglo-Australian miner BHP Billiton’s $38.6-billion bid for Potash Corp. of Saskatchewan.

The much-anticipated decision may mark the end of BHP’s unsolicited takeover proposal, which began nearly three months ago, although the company has 30 days to appeal the decision.

Industry Minister Tony Clement said the proposed transaction did not present a “net benefit” to Canada.

BHP Billiton said following the announcement that it was disappointed, but it “continues to believe that the offer is of net benefit to Saskatchewan, New Brunswick and Canada.”

The miner said it will continue to cooperate with the minister and the Investment Review Division of Industry Canada and will review its options.

Potash said in a statement that the government’s ruling “does nothing to change our view that the ... offer is wholly inadequate,” adding that the bid “fails to reflect both the value of Potash Corp’s premier position in a strategically vital industry and the company’s future growth prospects.”

The decision sent shares of BHP (BHP)
BHP, +1.07%
2.5% higher in Sydney. Stock in Potash (POT)
POT, +0.47%
tumbled almost 5% during after-hours trade in New York.

“Foreign companies are perhaps now more likely to think twice before considering acquiring a Canadian company, given the cost of a blocked bid. And conversely, perhaps foreign governments are likely to be more stringent in evaluating takeover bids by Canadian companies,” said foreign-exchange strategists at Nomura.

They said that the decision was negative for the Canadian dollar
USDCAD, +0.0000%
, “as investors are now pricing in the refusal and less M&A flows in the future.”

Canadian market analyst Colin Cieszynski noted the stock moves, saying that “political decisions can have a large impact on share volatility.”

In the past 20 years, the Canadian government has only blocked one other foreign takeover, Minneapolis-based Alliant Techsystems Inc.’s
ATK
bid for MacDonald Dettwiler & Associates Ltd. (MDA) in 2008, Cieszynski said.

Under the Canada Investment Act, the federal government must approve takeovers of domestic companies by foreign interests on the basis that the acquisition somehow benefits the nation overall.

BHP’s pursuit of Potash became increasingly political after Saskatchewan Premier Brad Wall rejected BHP’s bid, citing the negative financial impact a takeover would have on the province. Read more about Saskatchewan’s rejection.

“In the past decade, promises about maintaining jobs, corporate headquarters and future investment have all been broken,” Wall said, referring to previous Canadian takeovers. “We simply cannot take that risk with this valuable resource that belongs to the people of Saskatchewan.”

The province’s economy relies largely on royalties and taxes from the Potash industry. If the BHP takeover had succeeded, Saskatchewan’s tax yield from the potash industry would have been temporarily lowered, the Conference Board of Canada reported in its study of the potential acquisition.

Saskatchewan would have lost up to 2 billion Canadian dollars ($1.98 billion) over a 10-year period if the takeover had taken place, the report said. The province predicted the number to be higher, closer to C$3 billion in losses over 10 years.

In the weeks leading up to the decision, Saskatchewan gained support from Alberta Premier Ed Stelmech, whose province joins Saskatchewan and British Columbia in the “New West Partnership,” a barrier-free trade market.

Valuable resource

With roughly 30% of the world’s potash reserves in Saskatchewan, Canada’s control of the mineral gives it a strategic advantage in the industry. Divesting Canadian ownership of the resource by allowing the BHP takeover would have signified a willingness of the government to loosen its grip of the country’s natural resources and welcome foreign investment.

Potash, a nutrient mineral key to fertilizer, is an increasingly attractive commodity, especially in emerging markets where the resource is needed for expanded crop growth and demand. About 95% of world potash resources go into fertilizer product.

Before the decision, BHP Billiton announced a comprehensive package of promises in an effort to woo the Canadian government, including an offer to keep Potash’s headquarters in Saskatchewan.

Citigroup analysts wrote in a note after the decision that “it’s hard to see what additional concessions BHP Billiton can make to appease the Canadian government, given the existing plans to continue to invest in BHP’s and Potash’s growth projects.”

Mark Daniels, director of equities for Aberdeen Asset Management in Australia, said: “I think they are going to have a think about whether they will appeal or not. I would have thought that if you have a sovereign government coming out with a fairly emphatic decision, they might think: Why bother?”

“BHP hasn’t been trading particularly brilliantly since they initiated this bid as everyone thought that they would have to pay more,” Daniels said.

UBS analysts earlier this week said that the Anglo-Australian miner could have sweetened the deal in the final lead up to the deal close. The analysts predicted BHP could have raised its offer to as much as $165 a share, from its stated $130.

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